Sourcing in China: Best Practices for Medical Device Companies
By Kandace Nguyen Fu, Senior Vice President of Pacific Bridge Medical
To provide tips on how to avoid common risks and ensure the success of your China sourcing ventures, Pacific Bridge Medical (PBM)’s blog series, Sourcing in China: Best Practices for Medical Device Companies, will outline the sourcing process and provide tips for effective “best practices”, along with illustrative examples from sourcing projects we have assisted clients with in the past. Start reading from the beginning of the series at Phase 1 – Supplier Search, or navigate to other topics through the links below:
- Phase 1 – Supplier Search
- Phase 2 – Contract Negotiation
- Phase 3 – Purchase Order
- Phase 4 – Customs Requirements
- Phase 5 – Quality Inspections
- Phase 6 – Long-term Supplier Relations
The third blog in this series addresses key points regarding the evaluation of product samples and the process of making the first purchase order.
Requesting and Evaluating Product Samples
Prior to making any purchase orders from Chinese suppliers, it is imperative to request product samples from each supplier in order to check the quality of their products. For this step, be aware that Chinese suppliers may send over existing samples they have on hand that do not necessarily meet the buyer’s final product specifications, out of convenience or to cut down on costs. They may tell the buyer that they will tailor the product to the final specifications only once a large purchase order has been made. However, in this case, the buyer will not be able to confirm whether the manufacturer is capable of properly meeting all the desired specifications.
The buyer must insist that the samples meet the correct specifications and refrain from making a large order until the manufacturer has demonstrated that they can satisfy each and every product requirement. If the buyer conducted the supplier search step properly and found a qualified and trustworthy supplier, then the supplier should be accommodating towards the buyer’s requests.
After receiving the proper products samples, the product evaluation department should carefully review and assess the samples to identify potential flaws, defects, or other problems, which should then be communicated to the Chinese manufacturer.
Submitting the First Purchase Order
The buyer will need to meticulously review all purchase order (PO) forms to make sure the forms are filled out properly. Please take note of the following points regarding the PO form:
- Purchase Order Template
It is recommended for buyers to use their own PO template. Chinese suppliers are not likely to provide the level of detail you want voluntarily if the PO form does not clearly request certain information.
- Quality Guarantee Clause
Include a quality guarantee clause in the PO stating that the final products must meet all required specifications. The clause should clearly state that if the products do not meet the specifications, the supplier must replace the products at no additional cost.
- Bank Beneficiary Name
When reviewing a supplier’s completed PO form, check that the bank beneficiary name is the same as the supplier’s name. If the names do not match, this could indicate that the supplier is not a legitimate company. However, sometimes the supplier is legitimate and simply wants to accept payments through a third party entity. In this case, this detail should have been discussed early on during the negotiation process, so there should not be any surprises on the PO form. If the bank beneficiary name unexpectedly does not match the supplier’s name, you will need to contact the supplier to resolve the discrepancy. You can also request official company stamps from the supplier to further confirm the legitimacy of the company.
- Errors and Misunderstandings
Review the PO form carefully for numerical and spelling mistakes. This includes checking that the purchase quantity, unit prices, and stock keeping units (SKUs) are accurate, and all names and addresses are correctly spelled out. Grammatical errors may actually indicate a supplier’s misunderstanding of the content rather than a simple mistake, so be sure to communicate thoroughly with the supplier to confirm that they understand all the details and stipulations of the PO and the pro-forma invoice.
Do not move forward with completing the purchase order until verifying all of the supplier’s bank account information, business licenses, and regulatory details.
Case Study: Addressing the Minimum Order Quantity for Full Container Loads
During the purchase order phase, there may be certain discrepancies about the quantity related to the full container load (FCL) requirements. In one project, PBM conducted price negotiations with a supplier on behalf of our client. We were able to negotiate a significant reduction from the initial price quotes based on the minimum order quantity (MOQ) deemed acceptable by the supplier. However, upon issuing the client’s first PO to the supplier, we noticed the supplier’s subsequent invoice included an additional USD $380 charge for “not meeting FCL requirements.”
PBM asked the supplier for clarification about the extra fees charged to our client as a result of the client’s failure to meet FCL requirements. PBM justified to the supplier that our client met the MOQ for the price quote previously confirmed as acceptable by the supplier; therefore, additional charges should not be applicable and our client should not be charged for failure to meet FCL requirements.
The supplier argued that even though our client met the MOQ requirements to receive the supplier’s previously confirmed price quote for manufacturing the client’s goods, the quantity of the client’s purchase order did not match the FCL requirements (which are not related to production costs). The supplier further justified their previous statement by emphasizing that when a client’s purchase order quantity does not meet the amount required to complete a “full” container, additional fees must be paid to compensate for remaining container space.
PBM requested the confirmed FCL requirements from the supplier and revised the MOQ to factor in the quantities required for a “full” container load. We reverted the updated price quotes back to our client and asked our client to reassess their future supply chain plan. Based on PBM’s advisement, our client subsequently reduced their number of annual purchase orders and increased the number of quantities per purchase order.
Our client learned that although a supplier may agree to provide a confirmed price per unit based on a set MOQ for production and manufacturing, the MOQ required to meet a FCL must also be taken into account when completing cost assessments.
Although the supplier should have initially advised PBM and our client to consider this factor, this lack of transparency and foresight is quite common when conducting business agreements in China. Therefore, it is important for the buyer to remember to address the minimum order quantity required for a full container load with the supplier in advance. By taking the time to clearly outline the MOQ to qualify for specific prices as well as the quantity required to meet FCL requirements, companies can save time when finalizing their first PO.
Tune in to next week’s blog on phase 4 of the sourcing process: communicating with the Chinese suppliers on customs requirements and obtaining approval to import the products into your country!